The Pune bench of the Income Tax Appellate Tribunal (ITAT) held that the compensation paid by the builder for delay in handing over the possession of the flat is a part of a work-in-progress, thus, the bench allowed the deduction.
The Assessee, Jayant Hari Mulay is a promoter and builder who had purchased a certain piece of land for the construction of flats. According to the agreement, the assessee was to hand over certain constructed flats to the seller of the land. Therefore, a sum of Rs.12.00 lakh was claimed as a deduction in respect of compensation paid to the tenant.
The Assessing Officer (AO) called upon the assessee to explain the reasons for such deduction. The assessee explained that the project was supposed to be completed by 2013-14 but it was actually completed on 28-07-2017.
After negotiating with the landlord, the assessee agreed to pay a sum of Rs.37.00 lakh as compensation for non-completion and handing over the possession. Out of such Rs.37.00 lakh, a sum of Rs.25.00 lakh was paid in earlier years and capitalized as work-in-progress. The remaining amount of the compensation was paid during the year under consideration.
The case of the assessee is that the compensation of Rs.37.00 lakh was paid to the seller of the land not towards the purchase of the land but towards the delay in handing over the possession of the built-up area, as was stipulated to be.
The Authorized Representative (AR) submitted that a sum of Rs.25.00 lakh was claimed as part of work-in-progress in earlier years, which was not disturbed by the Assessing Officer. The assessee relied on an agreement with Mrs. Shobha Srikrushna Sawant, to whom such compensation was paid. It can be seen that there is some conflict between the stand taken by the assessee at the time of filing the return and that before the Assessing Officer during the course of assessment proceedings.
The assessee claimed such compensation to have been paid to the Tenant, whereas, during the course of assessment proceedings, the assessee claimed it as compensation to the seller. The authorized Representative relied on the above-referred agreement of Sale cum Development which has been placed on record to support the contention that the payment so made was compensation to the owner of the flats for the delay in handing over the possession.
A Single bench member consisting of R.S. Syal (Vice president) is of the opinion that it would be just and fair if the impugned order is set aside and the matter is remitted to the Assessing Officer for verifying the relevant clauses of the agreement.
If the payment is found to be compensation to the owner of the flats for the delay in handing over the possession, such an amount should be treated as a part of work-in-progress. The Assessing Officer will decide the nature of payment as per law after affording a reasonable opportunity of hearing to the assessee.
Thus, the appeal was allowed for statistical purposes.
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